Private Pension

LookingForTheSun

Hi,
I'm 40 and have a work place pension. I just about enter into the higher rate tax payer bracket.

I'm lucky enough to have around 1/3 of my salary free at the end of the month. I'm thinking of putting money into a private pension as an investment for the future.

If I take a private pension, do I get 40% tax relief, e.g. for every £100 I invest in a pension, I get £140 in the pension pot?

How does this actually work? E.g. I fill out a self assessment form and the government automatically adds £40 to the pension provider's pot or they post me a cheque?

Thanks


PS - not sure if it's the website or my browser, but the dictionary is constantly defaulting to US English :-(

dunstonh

If I take a private pension, do I get 40% tax relief, e.g. for every £100 I invest in a pension, I get £140 in the pension pot?

No. That is not how it works.

Assuming the £100 is wholly within the higher rate band, a £100 contribution would see you pay £80. You would then claim the higher rate relief - a further £20 - from HMRC via self-assessment. For most higher rate taxpayers that means filling in the pension contribution box on the tax return. However, if you dont get a tax return, you just let HMRC know how much you paid in gross to the pension that tax year.

The higher rate relief adjusts your Tax code. So, you get less tax taken from you. The gross contribution to the pension remains £100

LookingForTheSun

Thanks dunstonh, sorry, sill question "Assuming the £100 is wholly within the higher rate band" - how do you know/work which band the contribution falls in?

Marcon

If you have £10,000 of your earnings taxed at higher rate and pay £15,000 in pension contributions, only £10,000 will get 'extra' tax relief. The rest will just get basic rate relief.

LookingForTheSun

Thanks for explaining, from what you said, filling out the extra self assessment paperwork for the tax relief sounds like a worthwhile effort

atush

If you dont allready do SA you dont need to, just call HMRC and tell them you are paying more into a pension.

As a side note, are you already paying in enough to get the meax employers contribs?

Albermarle

I'm lucky enough to have around 1/3 of my salary free at the end of the month. I'm thinking of putting money into a private pension as an investment for the future

.

Before starting any new private pension, you could be able to just add more to your workplace pension. It depends exactly on the type of workplace pension . The advantage of doing this is that often an employer will have negotiated lower charges with the provider , than you could get yourself with a new pension. All the workplace DC schemes I have had you could add as much as you wanted to as long as you stayed within the HMRC maximum .Either through your monthly salary or as one off contributions

Also you might find that you are due some higher rate tax relief on your current contributions

MallyGirl

also if you use salary sacrifice for the work one you would gain on the NI avoidance too

Lotak

LookingForTheSun wrote: »

Hi,
I'm 40 and have a work place pension. I just about enter into the higher rate tax payer bracket.

I'm lucky enough to have around 1/3 of my salary free at the end of the month. I'm thinking of putting money into a private pension as an investment for the future.

If I take a private pension, do I get 40% tax relief, e.g. for every £100 I invest in a pension, I get £140 in the pension pot?

How does this actually work? E.g. I fill out a self assessment form and the government automatically adds £40 to the pension provider's pot or they post me a cheque?

Thanks


PS - not sure if it's the website or my browser, but the dictionary is constantly defaulting to US English :-(

If you are putting it into a private pension (not via your employer), then for every £100 you put in, your pension provider will recover £25 from HMRC and you can recover a further £25 from HMRC via a self assessment (or apparently you can contact them). This will cost you £75 overall for a £125 investment (saving 40%)

If you are putting it via your employer, you will put in £100 from your gross salary. It will cost you £58 as you will save 40% tax + 2% NI (42%). Depending on the method that your employer does the pension, you may or may not save the 2% NI. Not such a big deal for a higher rate taxpayer, but a much bigger deal for a basic rate taxpayer.

Albermarle

If you are putting it via your employer, you will put in £100 from your gross salary. It will cost you £58 as you will save 40% tax + 2% NI (42%)

Not all employers take the employees contributions out of their gross salary. Some take it from net salary . In this case it is the same as making any personal contribution . The pension provider adds basic rate tax relief and if you are a higher rate taxpayer you have to claim this relief back from HMRC .

LookingForTheSun

Albermarle,
Thanks, I'm currently looking into the options around the NHS scheme to see whether it's worthwhile, will do some more research on the best way forward...

https://www.nhsbsa.nhs.uk/member-hub/increasing-your-pension